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Feb 5, 2012

Capital gain on sale of long time residential property section 54

Capital gain on sale of long term residential property under section 54 of income tax act.

Exemption provisions in respect of capital gain arising on the sale of residential house are described as follows

-Assessee entitled to claim exemption:- exemption can be claimed on by an assessee who is either an individual or a HUF, no other assessee is eligible to claim the exemption

Conditions for claiming the exemption: - exemption is available subject to the following conditions.

-Capital gain should arise from the transfer of the residential house that is residential buildings or land appurtenant thereto: - the expression land appurtant thereto renders to land usually enjoyed or occupied with building. The tax authorities have to determine the extent of land appurtenant to a building transferred. It is not possible to lay down infallible tests to be applied for the determination of the extent of land appurtenant to a building as the tests vary depending upon facts and attendant circumstances of each case[CIT vs. Zaibunnisa begun (1985)(5) ITR 320]

Where entire extent of land, adjoining residence was used as pathways, service quarters etc., and entire land was treated as lands appurtenant to building [CIT vs. Smt M.Kalpagam (1997) 227 ITR 733.

-The residential house should be long term capital assets and no exemption is available to transfer of the residential house which is short term capital assets.

-The income of the residential house should be assessable under the head INCOME FROM HOUSE PROPERTY:- thus the house property should either

(1)Be let out for residential purposes

(2)Be used by the owner for his own residence. Income of self-occupied residential house is chargeable under the head income from house property even though in certain circumstances such income may be computed at nil or at a negative figure by virtue of section 23(2) and section 24 of the income tax act. Thus exemption is available in respect of a self-occupied residential house[Circular no. 538,dated 13-7-1989]

No exemption applies to capital gain arising on the sale of a building owned and allotted by an employer to his business employee for his residence; income from such letting being chargeable under the head profits and gains of business or profession[CIT vs. Sather (p) ltd. (1997) 226 ITR 910]

-Investment of the capital gain:- capital gain be invested

(1)Purchase of a residential house

(2)Construction of a residential house

(3)Deposit under capital gain scheme account with in the specified time limit.